HB25-1021, a bipartisan bill introduced in the Colorado House of Representatives, would expand the incentives under Colorado law to encourage employee ownership. The state already provides significant tax credits for companies to adopt ESOPs, worker cooperatives, employee ownership trusts, or other structures that provide employees with at least 20% of the company's equity.
Effective 2027, the proposed legislation would provide a capital gains tax exclusion for sellers to any of the plans named above. It also would provide a deduction for federal income tax paid by a worker cooperative of up to $1 million per year. The bill would also expand the existing tax credit program for converting to an employee-owned company.
Colorado law currently provides a refundable tax credit for up to $50,000 of the costs of setting up an ESOP and 50% of the costs, up to a maximum credit of $25,000, for other plans. Effective 2026, the proposed law would increase this percentage to 75%. Current law also provides a tax credit of 50% of the costs, up to a maximum credit of $25,000, for a qualified employee-owned business expanding its employee ownership stake by at least 20%. This proposed law would expand this to 75%. The proposed law would also allow 501(c)(3) nonprofits headquartered in Colorado to claim a refundable tax credit for up to 75% of their costs, up to a maximum of $167,000, in assisting one business per year in adopting an employee ownership plan. If the amount of the credit exceeds the income tax due on the applicable entity, the amount not used to offset income taxes is to be refunded to the entity.
Indiana HB 1038, a bill to create a linked deposit program for state funds to encourage ESOP lending, has been sent to committee. Sponsored by Jake Teshka (R-South Bend), the bill would revive a program that ran for several NEWSyears in Indiana in the early 2000s. The bill requires the state treasurer to establish and administer a program in which state funds are deposited in participating banks at not more than 3% below the comparable Treasury Bill rate. The bank then loans the money to a company using an ESOP to buy shares at a reduced interest rate corresponding to CDs offered by the bank. When the program was in effect before, a few loans were made under it. Interest rates were similar to today’s rates, but somewhat lower.
In a new paper, Employee Ownership, Employment, and Work-from-Home in the COVID-19 Shock to the US Job Market, published by the National Bureau of Economic Researchers, Huanan Xu of Indiana University South Bend, Joseph Blasi and Doug Kruse of Rutgers University, and Richard B. Freeman of Harvard University analyze data from the “COVID-19 Responses by Businesses with and without Employee Ownership Survey” to “contrast the employment practices of EO firms and non-EO firms in the Spring 2020 COVID-19 shock to the job market. The EOC survey asked executives in 747 private firms whether the firm had an Employee Stock Ownership Plan (ESOP)…and the number and timing of their moving work to workers’ homes in the crisis, along with standard questions about employment and other aspects of its business.”
The study found that “Majority-ESOP firms maintained total employment, and increased WFH [work from home] jobs more than other firms in the COVID-19 pandemic.” The data show a 15 percentage point smaller drop in employment as the pandemic began for the majority ESOP firms when compared to non-ESOP firms, and a 2% smaller drop for minority ESOPs. The pattern holds up when controlled by industry, region and other factors.
The results are similar to what the NCEO found in two large studies we did on how ESOP companies fared in the pandemic.